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Daily Newsletter, Thursday, 04/26/2001

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The Option Investor Newsletter Thursday 04-26-2001
Copyright 2001, All rights reserved. 1 of 2
Redistribution in any form strictly prohibited.
To view this email newsletter in HTML format with embedded
charts and graphs, click here:
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Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP (view in courier font for table alignment)
******************************************************************
04-26-2001 High Low Volume Advance/Decline
DJIA 10692.30 + 67.10 10767.00 10623.70 1.27 bln 1955/1114
NASDAQ 2034.88 - 24.92 2095.83 2032.38 2.03 bln 2125/1729
S&P 100 640.29 + 4.71 647.28 637.47 totals 4080/2843
S&P 500 1234.52 + 5.77 1248.30 1231.64 58.9%/41.1%
RUS 2000 477.56 + 4.82 479.81 472.99
DJ TRANS 2820.27 + 58.27 2840.28 2749.94
VIX 29.57 - 1.70 30.64 29.38
Put/Call Ratio 0.58
******************************************************************
Retracing The Rally
It was an interesting day of trading action as the markets finished
with a split decision: the Dow ($INDU) added another 67 points
while investors fled the NASDAQ, closing down 24 points. A slew
of earnings today moved individual stocks but trading was a bit
choppy out of the gates after Initial Jobless Claims and the
Employment Cost Index were released. But it wasn't the daily news
that raised my eyebrows today.
This morning's economic reports told two different tales. Initial
Jobless Claims rose 18,000 to 408,000, breaking the 400K mark for
the first time in five years. While evident of a loosening job
market, it also indicates that slowing growth is the point of
battle for the Fed, not inflation. Yet, in the same breath, the
ECI hit its highest level in a year, coming in a 1.1% versus
estimates of 1%. This rise in the ECI shows upward cost pressure,
however, it is negligible. With the Jobless Claims trending
higher, rising unemployment is expected to drive the rate toward
5% in the latter half of the year. To put this into perspective,
during the last recession of 1990-91, Jobless Claims peaked at
512,000 per week in March of 1991. Futures traded higher in the
pre-market on this morning's news, seeing that it further
solidifies the role of an aggressive Fed, widely expected to cut
rates again at the May 15th FOMC meeting.
On the NASDAQ, the big winner was PeopleSoft (NASDAQ:PSFT) which
reported stellar earnings, beating Street estimates of 9 cents by
two pennies. It wasn't the headline number that drove the stock
higher by 22%, rather the 500% revenue growth year-over-year in
an extremely difficult market and economic environment. In
addition, PSFT reiterated earnings projections for the year and
noted that they have widened the competitive gap from smaller B2B
players such as Ariba (NASDAQ:ARBA) and I2 (NASDAQ:ITWO). PSFT
finished at $36.62, up $6.69.
It is also worth noting that WorldCom (NASDAQ:WCOM) released
in-line earnings this morning and reaffirmed earlier financial
guidance for the year. The stock initially traded higher on the
news, holding above $20, but fell with the broader tech index
into the close. WCOM closed at $19.75, up $0.35.
Okay...now that we got the boring news out of the way, let me
tell you about the interesting developments I saw in the market
today. The NASDAQ traded a bit higher in the morning, however,
it wasn't very exciting. Typical consolidation. It remained
relatively flat between 2070 and 2090, acting well for the most
part. But its inability to move through 2095 set off a signal
that the NASDAQ really didn't have the legs to go higher. There
had to be a break, especially given the recent run-up. I was
watching the index via the QQQs, which were equally rangebound
between $45 and $46. The break of $45 offered a nice put entry.
Looking at the retracement bracket on the QQQs below, we can
see that since the recent April rally, the QQQs have backfilled
about 38.2% of the advance. (That's the percentage number which
is hard to see on the chart.) This level is exactly where buyers
stepped in on Wednesday, and it appears that this level may be
tested again. A break below this retracement level could very
well lead to a test of the 50% retracement, essentially filling
the gap from last Thursday. Keep a close eye on the action in
the QQQs when determining action points for your trades. If
techs pulled back further on a downside catalyst, support at the
68.2% line would be a great opportunity to establish long
positions.
Further strengthening the significance of these retracement levels
is the Semiconductor Index (SOX.X). It too is reaching a key
support area around 600. Again, like the QQQs, the SOX.X has
retraced approximately 38.2% of the recent rally and happens to
be in-line with 600. As we all know, the fate of the NASDAQ is
strongly tied to the Semi sector and this 600 level roughly
coincides with 2000 on the NASDAQ, also believed to be key
support. Buyers may choose to step up at these levels, however,
if this major support is broken, it would be safe to go short
along with a tight stop. Like the QQQs, we would expect the next
test to be at the 50% line. This does not change my general
upside bias in the market, but part of consolidation is retracing
the rallies.
After the bell today, we had a few big earnings reports. In the
biotech arena, Amgen (NASDAQ:AMGN) beat the Street by a penny, but
lowered their guidance for 2001 and are paying for it in after-hours.
AMGN traded $3 lower from its NY close. Look for the Biotech Index
(BTK.X) to test 500 tomorrow.
Fiber-optic player Corning (NYSE:GLW) also managed to beat estimates
by a penny. They also managed to cut 2001 estimates and 4,300 jobs
as well. Not so good. Their overexposure to Nortel (NYSE:NT) and
the general slowdown in the long-haul fiber market is going to take
its toll on GLW going forward. Even in the face of bad news, GLW's
stock traded higher by $0.25 from its NY close of $21.
The overachiever of the bunch tonight was Verisign (NASDAQ:VRSN).
They crushed Street estimates, which were downwardly revised earlier,
by ten cents! Needless to say, the stock moved $5 higher in after
hours, but I'm wondering who revised those numbers back in February.
Looking ahead to Friday, GDP and the GDP deflator will be announced
at 8:30am ET. Expectations are 0.9% and 3%, respectively. At
10am ET, Michigan Sentiment-Revised for April will be released.
The market expects 89. Don't forget that Friday trading typically
brings out the profit takers. As I stated above, key levels on the
NASDAQ, QQQs, and SOX.X will be action points for trades. While
the market feels like it is recovering and making strides, the
short-term(about a week) will likely be sideways to down. The
NASDAQ is digesting its recent gains and will give entry points
into long positions on a further pullback. Watch those retracements.
Volatility has imploded the past two days, closing under 30 at
29.57, which may be indicative of some selling pressure tomorrow.
Trade smart.
Matt Russ
Editor
****************
MARKET SENTIMENT
****************
Basing Or Breaking?
By Austin Passamonte
Market action switched abruptly from several-hundred index point
swings each session to range-bound action. Is it a coincidence
that summer-like weather arrives with this sudden slowdown, or
are we merely without lack of further catalyst to push prices in
either direction?
That will change as we approach the May 15th FOMC meeting when
that predictable herd will rally into the news sure as sunrise.
Better than that, it happens during expiration week this time!
Long straddles about 2:00pm EST could really turn into something
valuable three sessions later or less, but first things first.
Technology earnings continue to come out below estimates and with
no future outlook or murky in most cases. No matter, analysts are
goading us to buy now or forever miss the boat. Interesting how
free they are with our money, yet that institutional cash flow
continues to grow moss on the "sidelines".
On the technical front we see the Dow as our strong horse with
NASDAQ indexes the anemic sisters. The Dow rests atop its 50 and
200 DMA While the OEX, SPX and NASDAQs are above their 50 DMAs
but well below 200 DMAs respectively.
On Tuesday all of the above broke below ascending trendlines of
support dating back from April 3rd to Monday's close. Henceforth,
price action has stalled out the next two sessions right below
this subsequent point of resistance. It will take a break & close
above to convert these measures back to support.
Meanwhile, oscillators and especially stochastic values are
turning down from overbought extremes and pointing towards
further internal price weakness in the big indexes. Of special
note are the daily chart stochastic values: all are now in the
process of reversing down from overbought extremes toward
oversold. What does this mean?
Price action shall most likely move sideways to lower from
current values until these stochastic values cycle down from
overbought to oversold. It could take weeks or finish within the
next few sessions but rest assured the process will occur. High-
odds bullish plays can be expected upon completion of this cycle
from overbought to oversold but we would not overweight the
upside until then.
Each attempt to rally by the old index is not supported by the
newer sexy stocks. This tells us the same tired dollars are
playing ring around the sector without fresh blood joining the
fray. The next upside catalyst to do so could be the pre-FOMC
run, while further downside might arise from continually weaker
earnings than exuberant bulls who recently bought the whole farm
are willing to ride out.
We might expect sideways action going forward from here with less
volatility and more directional trend. Or are we only dreaming?
Trade the hourly trend with care!
*********
VIX
Thursday 04/26 close; 29.57
VXN
Thursday 04/26 close; 78.42
30-yr Bonds
Thursday 04/26 close; 5.77%
Support/Resistance Indicator
The Index Support/Resistance(S/R)Ratio is a formula used to
gauge possible support or resistance based on open-interest
disparity. Ratio listed is percentage of calls to puts or
puts to calls respectively.
Support is factored from dividing puts by calls at strike
levels beneath index closing price. Resistance is factored
from dividing calls by puts at strike levels above current
closing price. A reading above 10.00 is considered viable
resistance or support respectively within that general strike
price range.
Thursday
(04/26/2001)
(Open Interest) Calls Puts Ratio
S&P 100 Index (OEX)
Resistance:
680 - 665 13,390 90 148.78
660 - 645 5,150 1,136 4.53
OEX close: 640.30
Support:
635 - 620 15,916 7,487 .47
615 - 600 5,582 5,331 .96
Maximum calls: 625/10,287
Maximum puts : 580/ 6,478
Moving Averages
10 DMA 629
20 DMA 606
50 DMA 617
200 DMA 715
NASDAQ 100 Index (NDX/QQQ)
Resistance:
53 - 51 23,914 1,976 12.10
50 - 48 86,182 18,777 4.59
47 - 45 148,057 54,621 2.71
QQQ(NDX)close: 43.95
Support:
42 - 40 67,882 140,836 2.07
39 - 37 31,375 55,486 1.77
36 - 34 13,826 41,841 3.03
Maximum calls: 46/64,415
Maximum puts : 40/107,191
Moving Averages
10 DMA 44
20 DMA 41
50 DMA 44
200 DMA 70
S&P 500 (SPX)
Resistance:
1300 11,819 3,919 3.02
1275 18,779 4,038 4.65
1250 17,049 4,740 3.60
SPX close: 1234.52
Support:
1225 13,238 7,149 .54
1200 11,223 14,284 1.27
1175 11,469 9,066 .79
Maximum calls: 1275/18,779
Maximum puts : 1200/14,284
Moving Averages
10 DMA 1218
20 DMA 1180
50 DMA 1202
200 DMA 1352
*****
CBOT Commitment Of Traders Report: Friday 04/20
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts on the
Chicago Board Of Trade.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs are not.
Extreme divergence between each signals a possible market turn in
favor of the commercial trader's direction.
Small Specs Commercials
S&P 500 (Current) (Previous) (Current) (Previous)
Open Interest
Net Value +56586 +61808 -57843 -61473
Total Open
Interest % (+26.57%) (+28.76%) (-8.08%) (-8.46%)
net-long net-long net-short net-short
DJIA futures
Open Interest
Net Value -3031 -2326 +6200 +3973
Total Open
interest % (-20.21%) (-13.24%) (+20.88%) (+14.07%)
net-short net-short net-long net-long
NASDAQ 100
Open Interest
Net Value +3168 +3794 -7462 -7890
Total Open
Interest % (+12.12%) (+15.00%) (-10.48%) (-10.57%)
net-long net-long net-short net-short
What COT Data Tells Us
----------------------
Indices: Commercials are holding steady around the eight percent
net-short level on the S&P 500. We are seeing growing divergence
between the Commercials and Small Specs on the DJIA with the
Commercials adding to their net-longs and the Small Specs
increasing their net-shorts.
Data compiled as of Tuesday 04/17 by the CFTC.
**************
MARKET POSTURE
**************
Please visit this link for Market Posture:
http://www.OptionInvestor.com/marketposture/042601_1.asp
**************
TRADERS CORNER
**************
Option Investing Revisited
By Austin Passamonte
As oft stated in my little corner here, being editor of a website
allows me to receive plenty of email inflow. All are read, most
enjoyed and some contain nuggets of gold. Rest assured we'll never
run short on topic ideas in here!
Let me share two of many that set up our next series for a few
Thursdays going forward:
"Austin,
I've been a broker for seven years and recently moved to a major
wire house. Quite frankly I'm less than impressed with what they
offer retail clients in terms of execution and sell side research,
but I took an up-front check so I'm there for five years. Up-front
checks are good! (Editor's note: yes they are!)
I find it ridiculous that my clients have to pay high commissions
(average of 1% -2% per trade) yet we can't go the extra route for
them like Preferred does with OCO orders, stop loss on options,
etc. I've learned more from IS in the past few months I've been a
member than anything I've learned over seven years as a retail
broker. We are technically skewed whereas most equity players are
not. I want to do a great job for my clients and build a book of
business base on referrals I'll get for doing a great job for
them.
An old-time broker next to me has $100 million in assets and gets
3% on most of this just for delegating the management of these
assets to "outside" managers. (The majors have finally realized
that most retail brokers are not very good at picking stocks so
they encourage their brokers to place it with full-time money
managers and spend their time gathering more assets.)
There are a few holdouts like myself who want to maintain
accountability for our clients assets and feel we can do a better
job. Here is my question: Given the high transaction costs at my
firm, lack of "trading environment" executions, etc., what
strategy would you recommend I use in order to best service my
clients and make them money? If I'm making them consistent
returns, they won't mind paying me for it. I'd sincerely
appreciate any advice you could provide." (Name withheld for
obvious reasons)
And then my favorite...
"Austin,
I see you like 'cowboy action' option trading during expiration
week and I can assure you that is a losing-sum game. You cannot
beat the markets over the long haul, young man. Enough of us old
timers long ago know what you (are) going to find out soon
enough... markets always win.
I'm wondering what you know about investing. Can you tell us what
you do for your retirement account, if you even have one? Regards,
CM."
CM certainly pulls no punches and I love to hear from market
veterans who've seen more years' worth of action than I've been
alive. You have my utmost respect, CM and just like Mohammed Ali
in his prime, I will duck no one and accept all comers.
So let's talk about investing now, which seems timely now that the
worst of market declines certainly should lie behind us. If the
worst is indeed still ahead, successful investing is doubly
important for survival mode.
We're going to share some very simple, basic tactics for trade
entry & exit using stocks, sector shares, options and LEAPs that I
guarantee will look far too easy. Truth is it can be just this
easy if we remove the weakest link from our equation, that being
our own inner emotion but we'll park such conversation until
later.
The premise here is to get bullish near oversold extremes and
bearish near overbought extremes. We need a setup that allows us
high-odds entry & exit to capture chunks of profit from the midst
of sizeable moves. This can include simple buying and selling of
shares or options in addition to covered calls and various spread
strategies. Individual need for time-length and tax consideration
varies widely, so let's explore different strategies each may use
to meet such parameters.
Entry & Exit Setups
I honestly believe individual investors with a few basic tools can
outperform most fund managers on a yearly basis. Why? Because we
can use option strategies to speculate and/or hedge, which gives
us a decided advantage. The approach may indeed be simple & basic
but do not confuse this with "easy". It will take time, effort and
most of all personal growth but the results can be more than
worthwhile.
My dearest Uncle Tom made a fortune in the markets buying near
support and selling near resistance decades before any former cab
drivers ever discovered how to "roll" stocks. The approach we'll
look at has certainly stood the test of time and likewise promises
to do so long after we've retired from the markets as well.
Let's see what we might be able to accomplish using nothing more
than daily charts and stochastic values. Ideally we would only
take signals in harmony with the overall trend as investors with a
longer time horizon, while traders can take both sides of
overbought and oversold extremes.
For those who may not be 100% familiar with stochastic study, we
will refer to that specifically later in this series when we reach
the "how-to" stage.
(Daily Chart: JDSU)
Since early December 2000 until right now we have seen JDSU go
from "overbought" three times to oversold three times as measured
by stochastic action and nothing more. Now let me ask you this: if
we heeded that sell signal back in mid-December anywhere near the
$70 range, would that have been a good thing to do? Maybe bought a
few Jan 2002 50-strike put LEAPs dirt cheap with the proceeds, for
example? Think they gained any intrinsic value since then?
We had a second chance to do the same near $60 in late January and
a third chance to do so a few days ago near the $30 mark. Which of
those short-sell or put plays would have lost money?
By the same token there were four clear buy signals of which one
was a false signal potentially resulting in loss. A good reason
why we always have an exit strategy in place!
(Daily Chart: CSCO)
Same for mighty CSCO: sell above $50, sell above $40 or sell a few
days ago as well. Think there are any "investors" out there among
us who'd care to wind back this chart a few months and heed either
of those first two sell signals? Everyone had the chance but
precious few were willing to act as we'll later discuss.
(Daily Chart: SMH)
The Semi-Conductor HOLDR offered a real nice trading range over
the past few months itself. Go ahead and count up the buys & sells
one may have taken along the way. I see one clear loser out of
eleven extreme signals here. More importantly, what do you see?
(Daily Chart: MKH)
The Market 2000+ HOLDR includes the world's 50 largest companies
to comprise what I feel is the best blue-chip, big-cap investment
vehicle available today. Investors not familiar with HOLDRs in
general or this one in particular can learn all details at the
public website: www.amex.com
Four sells, four buys and only one clear dud. Could we have made
any money just waiting for such extreme alignments to occur? You
tell me.
I sure hope you never, ever take anything I say in here at face
value. I strongly encourage you to spend an hour or three scanning
some daily charts using nothing but stochastics to derive your own
conclusions. Just ask yourself what would happen if you merely
bought somewhere in the general vicinity of each extreme from one
reversal and held until the opposite side was reached.
Do this with every symbol you can think of for all the charts you
can tolerate looking at. May I respectfully suggest what you might
find? That this simple, simple, simple approach is worth more in
potential profits or capital saved than combined subscription cost
of OI & IS added together for ten lifetime's or more!
Next Thursday, Part II: "Here's The Catch"
Best Trading Wishes,
austinp@OptionInvestor.com
PICKS WE DROPPED
****************
When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.
CALLS:
*****
No dropped calls tonight
PUTS:
*****
TBH $50.25 +2.95 (+5.32) Technical weakness along with rumors of
economic and political uncertainty in Latin American were two
reasons for initiating this highly aggressive put play. While
the issues surrounding Argentina and Brazil continue to be an
on-going concern, traders that were once in a panic appear now to
be taking things in stride. Technically, the stock has bounced
on strengthening volume and in the process, has closed above both
its 5 and 10-dma (at $46.81 and $48.90 respectively). Now above
our stop price of $49, we are dropping coverage tonight.
FREE TRIAL READERS
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The Option Investor Newsletter Thursday 04-26-2001
Copyright 2001, All rights reserved. 2 of 2
Redistribution in any form strictly prohibited.
To view this email newsletter in HTML format with embedded
charts and graphs, click here:
http://www.OptionInvestor.com/htmlemail/042601_2.asp
********************
PLAY UPDATES - CALLS
********************
WMT $51.24 +0.57 (+0.81) This retail stalwart actually moved
to a high of $51.60 Thursday when the Dow was at its strongest
point. While WMT fell back later in the day, support is strong
at $50.50, and could be a possible entry point going forward.
WMT has now established a series of higher lows starting with
$45 on March 26th, $47.50 on April 12th, and the 50 dma of $50
this week. Today's close above the 200 dma of $51 is a bullish
sign, and a more conservative entry point could be taken at this
level. The next point of resistance is $52.75, and, with its
earnings approaching on May 15th, WMT may very well have a shot
at clearing this level. Watch others in the retail sector like
HD, S and TGT, as well as the retail sector, RLX.X and keep
stops at $50. We will close positions if WMT closes below the
$50 level.
AEOS $36.46 +1.16 (+1.48) The retail sector came roaring back
Thursday and the specialty apparel sector was among the best
performing of the retail stocks. AEOS has now formed an upward
stair step pattern, and may pull back to the $36 level tomorrow,
which could be an aggressive entry point. AEOS is having
difficulty penetrating the $37.50 level, and RLX.X is having
difficult penetrating the 880 level in the same fashion. A close
above $37.50 with strong volume could clear the way for a more
conservative call player to take positions, as AEOS would most
likely move easily to the $38.50 level from here. Above this
level, there is very heavy resistance at $40, which would take
a considerable amount of strength to penetrate. Continue to
monitor specialty retailers like GPS and TJX and move stops to
$35. We will end the play if AEOS closes below this level.
AA $42.08 +1.59 (+1.73) With Old Economy stocks enjoying a surge
recently, AA has benefited from this bullish action of the past
couple of days. Yesterday, in the midst of strength in the
broader markets, shares of the aluminum giant gained 1.33
percent. While volume was still light, the positive close and
bounce off its 10-dma (now at $39.85) was a good sign. Today, AA
advanced strongly, moving up 3.93 percent on almost 1.3 times the
average daily volume. In doing so, the stock closed at a new
52-week high. Now within striking distance of its all-time high
of $43.62, we are moving our protective closing stop up from
$39.50 to $40. Bounces off support at $42, $41.50 and $40 may
allow aggressive traders to take a position. For the more risk
averse, wait for AA to break above $42.50 with conviction before
making a play. In both cases, correlate entries with strength in
rivals AL and PY.
C $49.51 +0.21 (+0.09) On Tuesday we mentioned that shares of
financial services provider Citibank had been in consolidation
mode, trading in a narrow range on decreasing volume.
Price/volume action in the past couple of days has yielded more
of the same, with support below at $48 and resistance overhead at
just above $50. On Wednesday, with the NYSE in full rally mode,
C managed to rise 1.19 percent on 73% of the average daily
volume. Today the stock added fractionally to its gains on lower
volume. At this point, patient and disciplined traders could
stand to benefit from this period of calm. A break above $50 on
strong buying volume could give conservative traders the signal
to jump in, provided that the AMEX Banking Index (BIX) confirms
upward momentum. For aggressive traders willing to buy the dip,
C has moving average support from the 5 and 10-dma at $49.08 and
$48.79 respectively, reinforced by horizontal support at the $49
level. A bounce off our stop price of $48 may also be bought,
but make sure that the stock ends the day above this point.
BRCM $37.00 -1.10 (-1.69) When the Nasdaq and Dow both rallied
on Thursday, Broadcom went along for the ride, and reached a
high of $38.80 before the technology rally faded. The SOX.X
led the Nasdaq down on Thursday afternoon, and is starting to
get perilously close to its 50 dma of 590.86. At an analyst
meeting today, Intel's company management stated that they
did expect to see a seasonal pick up in demand in the fall, and
that they felt the outlook is brighter going forward for the
chip sector. However, they stated that uncertainties in the
macroeconomic environment continue, and could present problems
going forward if they do not improve. The fact that Broadcom
was able to rebound from its low point of $35.94 is impressive,
and BRCM is among the best positioned semiconductor stocks
to benefit if the sector recuperates going forward. Since the
SOX.X fluctuates wildly with the analyst comments de jour,
we must play Broadcom very carefully. Traders could consider
taking positions at current levels, but only if the SOX.X and
others like INTC are showing strength. A break above BRCM's
50 dma of $40.72 would be a very bullish sign, and a possible
entry point for conservative traders. We are keeping stops
at $35, so close positions if BRCM closes below this level.
AOL $49.51 +0.10 (+0.82) AOL led the media stocks as the market
lingered in purgatory today and made a fractional crack in the
$50 resistance during early morning trading. The trading volume
continued to remain robust as a pattern of higher intraday-highs
developed. The bullish prescription lends to a good probability
for an upside breakout; although the tightening trading channel
is rather frustrating. The price range, which is currently
dictated by the convergence of the 5 & 10 DMAs at $48.51 and
$47.09, respectively, continues to limit entry opportunities on
the downside. An enterprising trader might consider vying for a
position at the above-mentioned proximity in anticipation of a
dynamic and visible move through the $50 level. If this
strategy fits your trading style and is pursued, be prepared to
exit if AOL closes below our $47 protective stop. On a
breakout, watch for some opposition as AOL approaches the $55
and $57 marks. While AOL is a leader of the media-related
stocks, some others to watch include GMST, COX, UVN and even
DIS; all of which can impact the sector's sentiment.
*******************
PLAY UPDATES - PUTS
*******************
VRTS $55.39 -3.34 (-8.91) A failed rally past the $61.99 level
occurred on Thursday morning, and VRTS quickly fell to light
support at the $60 level. It is important to note that VRTS
fell to $57.50 shortly thereafter, and rolled over again from
a lower high at the 50 dma of $58.50 while the Nasdaq was
rallying during the mid afternoon. A head and shoulders has
now formed during April with the left shoulder at $62.77, the
head at $68, and the right shoulder at $62. VRTS closed on a
bearish note, and if the Nasdaq remains weak, it could possibly
drop below $55. This could be a good entry point for
conservative put players. The software index, GSO.X has managed
to stay above its 50 dma of 208.31, but a drop below this level
could be a very bearish sign for software stocks. Continue to
monitor others in the sector like MSFT and SEBL, and move stops
to $60. We will close positions if VRTS closes above this level.
HDI $44.79 +0.44 (+0.04) After finding support near $43 on
Tuesday, HDI investors hit the throttle yesterday, tagging along
on the broad market recovery that continued through most of
today's session. As the stock approached our stop at $45, HDI
ran out of gas and languished just south of that level for the
rest of the afternoon. We are at a pivotal point here on our
play. Resistance at $45 should keep the bulls in check, and
should the broader market weaken, we'd look for the stock to
begin its next downward leg. However, the broader market is
trying very hard to move higher. This could provide enough lift
to HDI to help it break its 7-month trend of posting lower
highs. Now that daily stochastics have dropped out of
overbought territory, it looks like the deck is stacked in favor
of the bears. Volume has been rather anemic the past several
days, and we need to see it pick up closer to the daily average,
before we can really place much stock in the price action.
Aggressive investors can consider nibbling on new positions
near current levels, but keep your stops in place. More
conservative traders will wait for the bears to flex their
muscle and push HDI below the $43 intraday support level before
taking a position.
PMCS $35.22 -3.8 (-9.59) In case you haven't noticed, the flu
bug that brought down the highflying Networking and
Semiconductor stocks is just as virulent as ever. Better known
as declining revenues and questionable visibility, the effects
can clearly be seen in the recent trading pattern of PMCS.
Despite tagging along on the recent NASDAQ recovery, we can see
the tech index declining back towards the critical 2000 support
level again, and PMCS and its Telecom Equipment brethren are
leading the decline. After boldly shooting higher last Friday
after posting inline estimates, the bears are clearly back in
charge. After the bulls had a slight up day yesterday,
the sellers piled on this morning, and pressured the stock right
up to the close today, serving up a 10% loss. Ending the day
just above the $35 support level, we are looking for
conservative traders to get their entry point as this support
level fails, preferably on increasing volume. Due to the recent
weakness, we are lowering our stop to $39. Aggressive traders
can still consider entering the play on failed intraday rallies
that rollover below our stop. As long as the Semiconductor
index (SOX.X) and Networking index (NWX.X) continue to lead the
NASDAQ lower, PMCS is unlikely to be capable of a sustained
recovery.
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NEW CALL PLAYS
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AGGRESSIVE:
LLY - Eli Lilly $81.39 +0.50 (+1.29 this week)
LLY discovers, develops, manufactures and sells Pharmaceutical
products targeted at the diagnosis, prevention and treatment of
human diseases. The company's best known commercial product is
the anti-depressant Prozac, although there are numerous other
lesser-known drugs that treat conditions such as Parkinson's
disease, diabetes, osteoporosis along with a broad range of
antibiotics. The company also conducts research to find
products to treat diseases in animals and to increase the
efficiency of animal food production.
Although LLY has come under significant selling pressure in
recent months due to speculation over the impact of patent
expiration on its blockbuster Prozac drug. Once the patent
expires, generic versions will begin to arrive in the
marketplace, potentially cutting into the company's revenue
stream. Despite these long-term concerns, the primary catalyst
to the stock's movement recently has been the investor's
interest in Drug stocks in general. Since topping out in
early January, the Pharmaceutical index (DRG.X) has seen heavy
selling, but appears to have found its sea-legs recently,
breaking above the 4-month descending trendline. LLY has
actually been performing better than the broader sector
recently, and has been in a sustained uptrend for the past
month, helped along by their own solid earnings report on April
16th. While not a fast-moving stock, LLY is providing a rarity
in this market -- namely a tradable trend. Every time the stock
pulls back to the 5-week ascending trendline, buyers appear and
push the stock higher, providing attractive and easily
manageable entry and exit points. In fact, a better tool for
gauging entry points is the 4-week ascending channel. Consider
new entries on a bounce from the lower channel line, currently
$79.50 (the site of our stop) or $80, the location of the
ascending trendline. Entries can also be considered on a break
above the $82 resistance level, but keep in mind that LLY is
likely to pullback again once it touches its upper channel line
near $83. Patient investors are likely to do better here,
waiting for the pullback before entering the play.
BUY CALL MAY-80*LLY-EP OI=3493 at $3.60 SL=1.75
BUY CALL MAY-85 LLY-EQ OI=3549 at $1.35 SL=0.75
BUY CALL JUN-85 LLY-FQ OI= 560 at $2.80 SL=1.75
BUY CALL JUN-90 LLY-FR OI= 281 at $1.40 SL=0.75
BUY CALL JUL-85 LLY-GQ OI=2731 at $4.40 SL=2.75
http://www.premierinvestor.com/oi/profile.asp?ticker=LLY
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NEW PUT PLAYS
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AGGRESSIVE:
Vitesse Semiconductor is a supplier of high-performance
integrated circuits targeted at systems manufacturers in the
communication and automatic test equipment (ATE) markets. A
leading manufacturer of gallium arsenide (GaAs) integrated
circuits, a type of IC that performs at higher speeds than
silicon chips. The company offers several products that address
the needs of high-performance communications systems at data
rates for the SONET, ATM, IP, Fibre Channel and Gigabit Ethernet
markets. VTSS also provides gate arrays and custom products that
offer a combination of high complexity, low power dissipation and
high speed for the ATE market.
Since bouncing strongly off the lows of early April, the Chip
sector, as measured by the Philadelphia Semiconductor Index
(SOX), has once again been showing signs of weakness.
Stochastics of many Chip stocks have already crossed over
bearishly with the first signs of a potential rollover already
apparent. With that in mind, shares of communications chipmaker
Vitesse have under-performed its sector both fundamentally and
technically. The company reported its earnings early last week.
VTSS just met Street estimates of 10 cents, with dramatically
weak revenue numbers. A bearish conference call, in which the
CEO called the quarter "disappointing", and a continued lack of
visibility going forward, was not a good sign. With that, CS
First Boston and Goldman Sachs cut their numbers for the upcoming
quarter. Interestingly enough, the two brokerages later upgraded
the stock. Joining the analyst tug-of-war, Merrill Lynch
downgraded VTSS this week from a NT Accumulate to a NT Neutral
rating. Technically, VTSS unlike other Chip stocks, was unable
to break above its 50-dma, now at $36.38. Since failing its test
of that moving average, the stock has pulled back on decreasing
volume. What appeared to be consolidation however has turned
into something a little more ominous. Today, VTSS fell over 12
percent and in doing so, now finds much moving average
resistance. Failed rallies at the 5 and 10-dma at ($32.33 and
$30.35 respectively) along with horizontal resistance at $30, $33
and our closing stop price of $34 may allow aggressive traders to
take a position. For an entry on weakness, conservative traders
may wait for a break below $28 on volume before jumping in. Just
make sure that peers AMCC and CNXT are also heading lower.
BUY PUT MAY-30*VQT-QF OI=1555 at $4.20 SL=2.50
BUY PUT MAY-25 VQT-QE OI= 628 at $1.75 SL=1.00
http://www.premierinvestor.com/oi/profile.asp?ticker=VTSS
CIEN - Ciena Corp $52.15 -5.39 (-14.94 this week)
CIENA Corporation's market-leading optical networking systems
form the core for the new era of networks and services
worldwide. CIENA's LightWork architecture enables next-
generation optical services to transmit signals simultaneously
over the same circuit. This multiplexing system changes the
fundamental economics of service-provider networks by
simplifying the network and reducing the cost to operate it.
About 45% of sales comes from outside the US markets.
Just when you thought it might be time for the champagne and
roses, a storm threatens to release its torrent - an applicable
analogy when it comes to CIEN. After rising off its lows as the
tech-laden NASDAQ resurrected itself earlier in the month, the
outlook is once again looking bleak for this optical networking
equipment stock. A slew of analysts, in particular UBS Warburg
and Goldman Sachs, cut ratings on most of the major equipment
makers this week. The influential firms mainly cited the
slowdown in spending amongst telecommunications companies as the
rational for the downgrades. But honestly, who hasn't heard
about that? No matter, investors took the analysts' comments
and recent economic data to market. On the week, CIEN lost
$14.94, or 22.3% and closed the door below the previous
resistance at the $55 level. Today's strong sell-off,
notwithstanding the NASDAQ attempt to shatter 2100, indicates
the downside activity may not be over. Other leaders in the
industry like Corning (GLW), Nortel (NT), Cisco (CSCO), and even
Sycamore Networks (SCMR) are also failing miserably. For
instance, after the market today, GLW spun another woeful
earnings' tale and lowered expectations going forward. It's
also obvious that NT isn't shaking off investor caution too
easily as it slides towards single-digit status; and CSCO just
recently announced it will discontinue selling its most
expensive product due to weak sales. If you're interested in
jumping into the negative momentum, look for heavy downside
volume to take CIEN through the 30-dma ($50.35); especially if
you're more conservative. Else, an aggressive rollover might
better suit your style. We currently have a $56 CLOSING stop on
CIEN and will drop coverage if the share price violates this
mark at the close. However, that's not to say the less-risk
adverse might find entries near the $60 level, just above the
intersected 5, 10, and 50 DMA lines, amid a sharp reversal. If
you take the road less traveled, make sure the bears are in
control and there's little doubt of the sector and market
sentiment.
BUY PUT MAY-55*EUQ-QK OI=5047 at $8.60 SL=6.00
BUY PUT MAY-50 EUQ-QJ OI=3189 at $6.10 SL=4.00
http://www.premierinvestor.com/oi/profile.asp?ticker=CIEN
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PLAY OF THE DAY - PUT
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VRTS - Veritas Software Corp. $55.39 -3.34 (-8.91 this week)
Veritas is an independent supplier of storage management
software. The company's products help to improve the level of
centralization, control, automation, and manageability in
computing environments. More specifically, the company's products
offer protection against data loss and file corruption, allow
rapid recovery after disk or computer failure, enable IT managers
to work efficiently with large numbers of files, and make it
possible to manage data distributed on large networks of computer
systems without harming productivity or interrupting users.
Most Recent Write-Up
A failed rally past the $61.99 level occurred on Thursday
morning, and VRTS quickly fell to light support at the $60
level. It is important to note that VRTS fell to $57.50
shortly thereafter, and rolled over again from a lower high at
the 50 dma of $58.50 while the Nasdaq was rallying during the
mid afternoon. A head and shoulders has now formed during
April with the left shoulder at $62.77, the head at $68, and
the right shoulder at $62. VRTS closed on a bearish note, and
if the Nasdaq remains weak, it could possibly drop below $55.
This could be a good entry point for conservative put players.
The software index, GSO.X has managed to stay above its 50 dma
of 208.31, but a drop below this level could be a very bearish
sign for software stocks. Continue to monitor others in the
sector like MSFT and SEBL, and move stops to $60. We will
close positions if VRTS closes above this level.
Comments
Shares of VRTS have traced a top-heavy head-and-shoulders (H&S)
pattern over the past two weeks of trading. This formation may
very well portend lower prices in the near-term for VRTS. The
neckline for VRTS' H&S can be located near the $54 - 55 range.
Ideally, we'd like to see the stock break below that range on
heavy volume, as support is scarce until the $47 level. However,
those traders with slightly higher risk tolerances may consider
getting in ahead of the curve with an entry at current levels or
on a rollover near the $60 level.
BUY PUT MAY-60*VIV-QL OI=15300 at $8.90 SL=6.50
BUY PUT MAY-55 VIV-QK OI= 3819 at $6.20 SL=4.00
http://www.premierinvestor.com/oi/profile.asp?ticker=VRTS
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COMBOS/SPREADS/STRADDLES
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Blue-Chips Lead The Way!
Industrial stocks rallied again today amid renewed strength in
cyclical, retail and oil issues.
Wednesday, April 25
Stocks rebounded today as investors looked ahead to a potential
economic recovery in the second half of 2001. The Dow closed up
170 points at 10,625 while the NASDAQ ended 43 points higher at
2,059. The S&P 500 index ended up 19 points at 1,228. Trading
volume on the NYSE hit 1.17 billion shares with advances beating
declines 2-to-1. On the NASDAQ, volume hit 1.96 billion shares
with winners beating losers 23 to 15. In the bond market, the
30-year Treasury fell 11/32, pushing its yield up to 5.78%.
Tuesday's new plays (positions/opening prices/strategy):
Scios (NASDAQ:SCIO) JUN30C/J20P $0.70 debit synthetic
Scios (NASDAQ:SCIO) MAY20C/M22C $2.25 debit bull-call
Visx (NYSE:EYE) SEP30C/M30C $0.95 debit calendar
Progressive (NYSE:PGR) MAY95P/M100P $0.55 credit bull-put
Our bullish selections in SCIO were accurate but not timely as the
issue opened almost $2 higher and never retreated. There were no
opportunities to open those positions. However, VISX and PGR did
offer the target entry prices.
Portfolio Plays:
Industrial issues rallied today following the release of a number
of positive earnings reports and strong housing data. News that
home sales climbed to record levels, a sign the sluggish economy
has pockets of strength, triggered a buying spree in the broader
market and a new round of short-covering boosted share values.
On the Dow, Walt Disney (NYSE:DIS) surged almost 8% after posting
a second-quarter profit of $0.19 a share, which topped consensus
estimates by $0.06. Disney also expects to achieve double-digit
earnings growth this year. Home improvement retailer Home Depot
(NYSE:HD) enjoyed buying pressure amid the strong housing data and
Philip Morris (NYSE:MO) rose 6% to $50 on speculation the company
may raise cigarette prices in the near future. General Electric
(NYSE:GE) and Honeywell (NYSE:HON) also benefited from the rally
in blue-chip issues. In technology trading, shares of Amazon.com
(NASDAQ:AMZN) rebounded after the company posted a first-quarter
loss of $0.21 a share, better than the $0.24 shortfall expected by
analysts. The company also said it expects profits to improve in
the second quarter. Semiconductor stocks also rose after Applied
Micro Circuits (NYSE:AMCC) offered an optimistic outlook for the
last half of 2001 but the upbeat attitude was tempered by selling
pressure in telecom equipment shares after UBS Warburg downgraded
the group. Cisco Systems (NASDAQ:CSCO), Nortel Networks (NYSE:NT)
and Juniper Networks (NASDAQ:JNPR) all fell victim to the research
note, which cited an expected decline in capital spending. Inside
the broader market, biotechnology stocks rallied and drug shares
also finished higher after solid earnings reports from a number of
bellwether companies. Banking and financial issues also rebounded
from Tuesday's slump while oil service shares continued to advance.
The Spreads Portfolio enjoyed today's bullish activity and almost
every category benefited from the upside momentum. Stocks in the
S&P 500 sectors performed well and oil issues were particularly
strong. The recent movement in this group has been favorable for
the broader market but at the same time, one of our bearish plays
is under pressure due to the rising share values. Tota Fina Elf
(NYSE:TOT) has rallied to a past resistance area on solid volume
and it will likely test our sold strike at $75. The potential
for further upside activity is somewhat limited, based on heavy
overhead supply near $76-$78, but we don't want to get into a
situation like last month's Avery Dennison (NYSE:AVY) spread.
The obvious alternative is to roll up and forward to a (short)
JUN-$80 Call, which is above any price the issue has achieved in
its past. The debit to close the play in today's session pushed
the overall basis to a loss of approximately $0.70, but the sale
of the new call option (MAY-$80) will provide an additional credit
in the play. Our initial goal will be a new cost basis of $80.50
with a maximum gain of $0.50, if the issue finishes below $80 in
June.
Thursday, April 26
Industrial stocks rallied again today amid renewed strength in
cyclical, retail and oil issues. The Dow was up 67 points at
10,692. Profit-taking in technology issues pushed the NASDAQ
down 24 points to 2,034. The S&P 500 index ended up 5 points
at 1,234. Volume on the Big Board hit 1.27 billion shares with
advances beating declines 19 to 11. On the NASDAQ, volume was
average at 2.01 billion shares traded with winners outpacing
losers 21 to 17. In the bond market, the 30-year Treasury rose
1 point, pushing its yield down to 5.69%.
Portfolio Plays:
Stocks ended mixed today as the industrial segment moved higher
on strength in financial and cyclical components while technology
stocks slumped amid a sell-off in semiconductor shares. The Dow
advanced on gains in American Express (NYSE:AXP), Alcoa (NYSE:AA),
Walt Disney (NYSE:DIS), DuPont (NYSE:DD), Honeywell (NYSE:HON),
General Electric (NYSE:GE), International Paper (NYSE:IP) and J.P.
Morgan (NYSE:JPM). On the NASDAQ, almost every sector declined
but some buying pressure was seen in software stocks and Internet
issues. Leading the broader market higher were shares of oil and
oil service, natural gas, financial, precious metals and transport
issues. One well-known analyst expressed some comments about the
recent caution among investors. UBS Warburg's Edward Kerschner
said that, "With second quarter earnings expected to be weak, the
temptation is to avoid buying stocks until an upturn in economic
activity and profits is definitely under way. History suggests
this would be a mistake. In the last three recessions, the stock
market bottomed four to five months before industrial production
turned up and six to 14 months before positive earnings growth
resumed." I, for one, hope his optimistic outlook is correct.
The Spreads/Combos section enjoyed a number of bullish moves in
today's session as investors diversified into various areas of
the market. In the telecom sector, WorldCom (NASDAQ:WCOM) was
a positive influence, posting a first-quarter profit of $0.25,
in line with analysts' consensus estimates. The optimism over
the quarterly report spread to other companies in the group and
that helped our long-term positions in AT&T (NYSE:T) and Sprint
(NYSE:FON). Our new speculation play in Infospace (NASDAQ:INSP),
which offers content and services to Internet sites and wireless
companies, benefited from the company's quarterly report. INSP
announced a quarterly loss that was smaller than expected as
strong wireless demand helped the once high-flying company get
back on track and their share value rose 4% to $4. Active Power
(NASDAQ:ACPW) recovered from post-earnings selling pressure and
the issue closed up 5% at $22.50. Our break-even basis in the
conservative credit-spread is near $17. In the retail sector,
Liz Claiborne (NYSE:LIZ) led the way with an unexpected rally to
$48 and our new bullish position in Progressive (NYSE:PGR) is
off to a good start as the stock is now $15 above the sold Put
option at $100.
Questions & comments on spreads/combos to Contact Support
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- NEW PLAYS -
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UNH - UnitedHealth $64.87 *** Earnings Speculation! ***
UnitedHealth Group (NYSE:UNH) forms and operates markets for the
exchange of health and wellbeing services. The company provides
a broad spectrum of resources to help people improve their health
and well being through all stages of life. The company's Health
Care Services segment consists of UnitedHealthcare and Ovations.
UnitedHealthcare coordinates network-based health and well-being
services on behalf of local employers and consumers in six broad
regional U.S. markets. Ovations is a business that advances the
health and well-being goals of Americans in the second half of
life, age 50 and older. Uniprise is devoted to serving the needs
of large organizations. The company's Specialized Care Services
is a portfolio of specialized health and well-being companies.
The company's Ingenix business operates in the field of health
care data and information, analysis and application.
The majority of managed care firms are expected to report solid
quarterly earnings growth due to increases in premium prices and
some analysts say the gains could be as high as 20%. Revenues in
the industry are expected to rise 8% on average and with strong
fundamentals, expanding margins and tight cost controls, earnings
growth may continue to exceed expectations throughout the coming
year. Obviously, traders are expecting positive news when UNH
offers its results tomorrow morning (before the open) and if there
is post-announcement dip, we may be able to achieve a reasonable
entry point in this speculative position.
PLAY (speculative - bullish/synthetic position):
BUY CALL MAY-70 UHB-EN OI=720 A=$1.05
SELL PUT MAY-60 UNH-QL OI=1196 B=$1.05
INITIAL NET CREDIT TARGET=$0.25-$0.50 TARGET PROFIT=$0.75
Note: Using options, the position is similar to being long the
stock. The collateral requirement for the sold (short) put is
approximately $2,200 per contract.
http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=UNH
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PVN - Providian Financial $51.56 *** Rally Potential? ***
Providian Financial (NYSE:PVN), through its subsidiaries, is a
leading provider of lending and deposit products to customers
throughout the United States and they also offer credit cards in
the United Kingdom and Argentina. The company serves a broad,
diversified market with its loan products, which include credit
cards and membership services products. The company also offers
various deposit products and has more than $31 billion in assets
under management and over 14 million customers.
Companies in the Credit Services industry have been in the news
recently with the improving interest-rate environment and PVN is
one of the leaders in the sector. Last week, the company posted
30% earnings per share growth for the first quarter 2001 on total
profits of $230 million, well above the $174 million in the first
quarter of 2000. During the quarter, customer accounts grew to
17.1 million, a 31% increase over the end of the first quarter of
2000, driven by new accounts and strong customer retention. The
total number of managed loans also increased by $1.3 billion to
$28.4 billion in what is typically a seasonally slow quarter for
that segment. The CEO said the company continues to build a very
strong consumer franchise, as evidenced by a continued high level
of customer retention during the quarter, and he is very pleased
with the positive business momentum in the midst of an uncertain
economy. Investors apparently agree with his outlook and this
position offers a conservative way to profit from future bullish
activity in the company's share value.
PLAY (conservative - bullish/credit spread):
BUY PUT MAY-40 PVN-QH OI=3257 A=$0.55
SELL PUT MAY-45 PVN-QI OI=243 B=$0.95
INITIAL NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% B/E=$44.50
http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=PVN
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- STRADDLES AND STRANGLES -
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SHPGY - Shire Pharma $51.60 *** Trading Range? ***
Shire is a rapidly growing international specialty pharmaceutical
company with a strategic focus on four therapeutic areas: central
nervous system disorders, unique metabolic diseases, oncology and
gastroenterology. SHPGY has a sales and marketing infrastructure
with a broad portfolio of products, with its own direct marketing
capability in the US, Canada, UK, Republic of Ireland, France,
Germany, Italy and Spain and with plans to add Japan in the next
few years. The company also covers other pharmaceutical markets
indirectly through distributors and their global sales coverage
continues to grow.
We like this issue for a premium-selling position because it has
a relatively well-defined trading range and no apparent news or
events that will substantially change its character prior to the
May options expiration. SHPGY's quarterly earnings announcement
occurred earlier today and the news was favorable with a positive
outlook for the future. The issue traded with an upside bias and
the current trend is bullish. However, our profit envelope is
outside the most recent trading range at $42-$57 and our plan is
to sell OTM options for credit and use the earned income to offset
any losses on the downside. If the stock rallies above the recent
resistance area near $58 on heavy volume, we will close the short
call or buy the stock to cover the position.
PLAY (conservative - neutral/credit strangle):
SELL CALL MAY-60 UGH-EL OI=490 B=$0.95
SELL PUT MAY-40 UGH-QH OI=375 B=$0.70
INITIAL NET CREDIT TARGET=$1.65-$1.75 PROFIT(max)=11%
UPSIDE B/E=$61.65 DOWNSIDE B/E=$38.35
http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=SHPGY
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